RETIREMENT PLANNING

The path to a successful retirement starts with creating an overall plan To live well in retirement, you no longer can rely solely on a company pension plan or Social Security. Instead, you will have to depend on how skillfully you plan and invest, and whether you make good use of tax-advantaged savings plans such as 401(k)s and IRAs. First, estimate how much you will need. One rule of thumb is that you'll need 70 percent of your annual pre-retirement income to live comfortably. That might be enough if you've paid off your mortgage and are in excellent health when you kiss the office goodbye. But if you plan to build your dream house, trot around the globe, or get that Ph.D. in philosophy you've always wanted, you may need 100 percent of your income or more. Remember, too, that your health care expenses are likely to go up in retirement, if only because you'll be paying more for insurance. Second, figure out how you'll meet those expenses. There are three main sources of retirement income: Social Security, pensions and annuities, and your savings. Start by determining your estimated Social Security benefits. (If you haven't already received a statement in the mail, you can order one online or use an online calculator to make estimates based on expected earnings.) Next, add in any annual payouts you expect from an annuity or company pension. If it's not enough, it's time to think about where that money will come from. Count on needing at least $15 to $20 in investment savings to cover each dollar of that shortfall. If your projected retirement expenses exceed Social Security and pensions by, say, $20,000 a year, that means you'll need a nest egg of $300,000 to $400,000 to bridge the gap.   1. Save as much as you can as early as you can. Though it's never too late to start, the sooner you begin saving, the more time your money has to grow. Gains each year build on the prior year's -- that's the power of compounding, and the best way to accumulate wealth. 2. Set realistic goals. Project your retirement expenses based on your needs, not rules of thumb. Be honest about how you want to live in retirement and how much it will cost. Then calculate how much you must save to supplement Social Security and other sources of retirement income. 3. A 401(k) is one of the easiest and best ways to save for retirement. Contributing money to a 401(k) gives you an immediate tax deduction, tax-deferred growth on your savings, and -- usually -- a matching contribution from your company. 4. An IRA also can give your savings a tax-advantaged boost. Like a 401(k), IRAs offer huge tax breaks. There are two types: a traditional IRA offers tax-deferred growth, meaning you pay taxes on your investment gains only when you make withdrawals, and, if you qualify, your contributions may be deductible; a Roth IRA, by contrast, doesn't allow for deductible contributions but offers tax-free growth, meaning you owe no tax when you make withdrawals. 5. Focus on your asset allocation more than on individual picks. How you divide your portfolio between stocks and bonds will have a big impact on your long-term returns. 6. Stocks are best for long-term growth. Stocks have the best chance of achieving high returns over long periods. A healthy dose will help ensure that your savings grows faster than inflation, increasing the purchasing power of your nest egg. 7. Don't move too heavily into bonds, even in retirement. Many retirees stash most of their portfolio in bonds for the income. Unfortunately, over 10 to 15 years, inflation easily can erode the purchasing power of bonds' interest payments. 8. Making tax-efficient withdrawals can stretch the life of your nest egg. Once you're retired, your assets can last several more years if you draw on money from taxable accounts first and let tax-advantaged accounts compound for as long as possible. 9. Working part-time in retirement can help in more ways than one. Working keeps you socially engaged and reduces the amount of your nest egg you must withdraw annually once you retire. 10. There are other creative ways to get more mileage out of retirement assets. For instance, you might consider relocating to an area with lower living expenses, or transforming the equity in your home into income by taking out a reverse mortgage How should I invest? Tilt your portfolio mix toward stocks to keep ahead of inflation Your retirement savings are sacred, so you don't want to take crazy risks. That doesn't mean you should rely solely on safe investments such as bank CDs and money-market funds. To build a nest egg large enough to see you through retirement, which may last 30 years or more, you'll need the growth that stocks provide. From 1926 through 2004, stocks -- broadly speaking, using the S&P 500 index as a measure -- have posted an average annual return of 10.4 percent versus just 5.4 percent for bonds, according to Ibbotson Associates. Given stocks' superior long-term returns, some financial advisers recommend that investors whose retirement is still 20 years or more away put the lion's share of their portfolio in stocks and stock funds. Of course, a 100 percent stock portfolio can give you some hair-raising moments (or years). In the 1973-74 bear market, for example, U.S. stocks lost 43 percent of their value and took three-and-a-half years just to get back to where they started. And who knows when stocks will get back to the highs reached in early 2000? Moreover, those whose stock portfolios are concentrated may suffer even more dramatic ups and downs. If you don't have the stomach for steep downturns, a more prudent course is to throw some bonds into the mix. Putting 70 percent of your portfolio into stocks and 30 percent into bonds, for example, will let you capture most of the long-term growth of stocks while sheltering your investments somewhat during meltdowns. As you approach retirement age, the idea is to shift more into bonds. But even in retirement, which can last a few decades, it pays to maintain a healthy dose of stocks (maybe upwards of 50 percent in your seventies, and up to 30 percent in your eighties). Try to understand the kind of companies you're investing in. More volatile stocks may not be appropriate for you at this stage in your life.